The U.S. Federal Reserve announced Monday afternoon it will establish a facility to facilitate lending to small businesses via the Small Business Administration’s Paycheck Protection Program (PPP) by providing term financing backed by PPP loans.
The Fed’s initiative will free up banks to remove PPP loans from their balance sheets so they can issue more coronavirus stimulus package loans to small businesses impacted by the health emergency.
Lack of Bank Capital to Fund Loans
As banks are being overrun with PPP applications, some financial institutions fear they do not have the capital necessary to fund the loans. Despite the PPP loans being guaranteed by the SBA, the funding comes from the bank’s assets.
The Paycheck Protection Program already was facing technical difficulties on day one upsetting many borrowers.
This announcement appears to address the next problem of available capital to actually fund the loans small business owners need. Without this backstop from the Feds, it is likely some banks would have to stop accepting PPP loan applications soon.
The central bank is working to finalize this new program and will announce details later in the week.
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